Has the SMCR Created a New ‘Accountability Firewall’? [Talking Point]

In this blog post, Principal Consultant, Liz Hornby, explores the risk that the Senior Managers and Certification Regime (SMCR) may encourage the very same practices its creation sought to combat.

The SMCR: Setting the Scene

The SMCR has been in place for the banking sector since 2016 and but will apply to the whole of the UK financial services industry by the end of 2019. From the regime’s birth in the emotionally charged sessions of the Parliamentary Commission on Banking Standards (PCBS), its central aim has been to increase personal responsibility and accountability at all levels of the industry, particularly at the top. As Andrew Tyrie, Chairman of the PCBS, put it, “A lack of personal responsibility has been commonplace throughout the industry. Senior figures have continued to shelter behind an accountability firewall”¹.

Responsibility and Accountability Under the SMCR

In the context of the SMCR, the terms ‘responsibility’ and ‘accountability’ usually appear together and, confusingly, are often used interchangeably. It is important, however, to separate out their distinct meanings:

• Responsibility, in this context, refers to meeting the standards of conduct and competence applicable to a role.
• Accountability refers to the regulatory consequences of failing to meet those standards.

The Financial Conduct Authority’s (FCA) test of ‘personal culpability’ is the linkage between the two, while non-deliberate acts and omissions are judged against what is deemed to be ‘reasonable’ on the facts of a particular case.

The threat of Senior Managers being jailed for a failure to properly discharge their responsibilities was abandoned before the SMCR was first rolled out (except for in the most extreme circumstances). There are, however, significant regulatory consequences under the regime for all employees, including fines, industry-wide bans and regulatory references.

Discover more: 'SMCR Training: The Definitive Guide'

Responsibility and Accountability for Senior Managers

The SMCR categorizes the most senior level of employees as Senior Managers. These are the handful of individuals who essentially run a firm. They were the main target for the media and politicians following the financial crisis, with headlines calling for them to be sent to jail or at least named, shamed and fined. It was the seeming inability of the SMCR’s predecessor to hold these individuals to account that led directly to the creation of the SMCR.

The key instruments of responsibility and accountability introduced under the SMCR for this group include Statements of Responsibilities, Responsibility Maps and Prescribed Responsibilities, which collectively seek to identify and document the responsibilities of Senior Managers. Alongside these are the Senior Manager Conduct Rules, underpinned by the FCA’s ‘reasonable steps’ test, that sets the standard of conduct and competence to which Senior Managers are held.

As a result, one tangible outcome of the SMCR has been a material increase in governance paperwork. This brings with it, however, as an unintended consequence, the potential for this paperwork to be used to erect a protective wall around Senior Managers—in effect creating a new form of the very “accountability firewall” that the SMCR sought to remove.

One example of this is the strategic use of attestations and similar vehicles that have the primary aim of discharging personal accountability by demonstrating that the Senior Manager has met the “reasonable steps” test.

Certified Persons and Other Conduct Rules Staff

For Certified Persons and other Conduct Rules Staff, the main tools for increasing responsibility and accountability are the Individual Conduct Rules and the regulatory consequences of failing to meet the conduct and competence standards set by them. Certified Persons must also pass an annual ‘fit and proper’ assessment.

Here the unintended consequences of the new regime are linked directly to escalation, reporting and ‘speaking up’. These are concepts that resonate with the current work by the FCA on psychological safety in the workplace².

Firstly, there is a risk that employees will be held accountable on the grounds of their failure to ‘speak up’. This can result in more junior employees being ‘scapegoated’ by those above them in the management hierarchy.

Secondly, there is a risk that employees, fearful of taking decisions because of the consequences of ‘getting it wrong’, may over-escalate as a defensive response. The rationale being that if someone more senior takes the decision, then the accountability passes to them. This is particularly relevant given the increased focus on the role of the first line of defense. If this approach is taken to its extreme, business can be materially impeded, with the board ultimately being asked to take every level of decision, down to the type of coffee served in the coffee machines!

Conclusion: The Jury Is Still Out

This is a good time, as we prepare for the regime to complete its rollout in December, to assess how the tools provided by the SMCR in relation to responsibility and accountability are working in practice. The jury is still out.

We do not yet have any significant governance-related disciplinary cases under the new regime to serve as precedents. All those involved in the implementation can, however, play a role in ensuring that the tools provided by the SMCR are not subverted and that employees, at all levels, feel sufficiently empowered and confident not to use them defensively.

For more insights on SMCR training, download our free ebook, ‘How to Ensure Your Organization is SMCR-Ready’

LEO GRC has extensive experience of SMCR training and supporting organizations to implement it. To find out more about our off-the-shelf courses and custom solutions, get in touch. To request a free trial of one of our off-the-shelf courses today, scroll to the Personal Conduct section of our eLearning course catalog.